I am a London-based journalist covering international business and investment opportunities for entrepreneurs throughout the world. I believe entrepreneurship can transform the world economy and be the best tool for addressing issues in the developing world. I look at interesting and unusual business models, how society supports and interacts with entrepreneurs and the role technology plays in entrepreneurship and innovation. I also look at what red-tape, rules and regulations budding entrepreneurs will face as they explore new markets. I currently also write for the international business and investment publication, PathfinderBuzz.com and the market analysis publication, ECigintelligence.com. I previously worked as a freelance journalist, writing for publications such as International Business Times, The Grocer and AGI Magazine. Prior to that I worked for the industry publication, Food Manufacture Magazine.

How To Beat The Bank: P2P Lending Could Lead To Higher Interest Rates

Sick of small returns? Investors with excess liquidity are having trouble getting their money to work for them at a time of historically low interest rates.

The Peer-to-Peer (P2P) lending model of crowd-funding for business has stepped in to offer an alternative method of investment that promises a higher level of returns, but with a potentially higher level of potential risk.

P2P sites, where investors can back entrepreneurs (generally ones with more established businesses) by pooling funds together to offer as a security-backed loan, offer a variety of innovations to help investors determine what risk-reward ratio they want to take on.

For instance Funding Circle, the largest business-oriented P2P lending site, has established a “sophisticated credit assessment process” that enables it to provide lenders with a variety of established, credit-worthy businesses divided into different risk bands and assigned a corresponding letter grade.

Lenders on the site can then specify the amount they wish to risk and what rate of interest they want in return. This means that investors on the site can earn an interest rate of 6.1% on a weighted average (over 180 days and after fees and potential bad debts are deducted).

However, those looking to modify the risk-reward ration can earn higher rates of as much as 10.7% (after deduction of average bad debt) by investing in the lowest band of investment grade, C- (only introduced in July, 2013).

“We’re trying to create a marketplace that’s an exchange,” says James Meekings co-founder Funding Circle. “On one side you have different lenders with different appetites for risk and returns they want to generate. This allows us to access a wider credit spectrum and do things in different ways. We’re creating a version of the London Stock Exchange but for business loans.”

London Stock Exchange (Photo credit: Wikipedia)

Thin Cats, another P2P lending site, takes a slightly different approach and runs a network of local ‘sponsors’ – groups of experienced financial personnel – who can go out and evaluate businesses at a personal level. This means that the cost of borrowing for the businesses is slightly higher (lenders pay no fees) but a wider range of viable businesses are accepted – with some that fail the automatic part of Funding Circle’s application process being accepted on the Thin Cats site.

For example, a second-hand motorcycle dealership was approved by Thin Cats after initially failing the Funding Circle automated credit check. The company had encountered some trouble when it decided to start selling new motorcycles as well as second-hand bikes but was fundamentally sound. A Thin Cats sponsor went down, saw the business in person and ended up supporting its approval – a decision which worked out well for everyone, says Kevin Caley, Managing Director and Founder of Thin Cats.

Overall Thin Cats has been able to average around 9.59% on returns (after losses are subtracted). “RIght now savers aren’t earning enough to cover inflation,” adds Caley. “Every year their income is going down and they are only earning a small rate of interest. P2P sites are offering a good savings opportunity – not only a source of funds for business but also a safer place to put your money.”

But just how safe are P2P sites? In total 1.5% of loans on Funding Circle have not been repaid – in line with estimates, says Meekings.

Thin Cats reports that eight businesses, out of 254 loans (a third of which are repeats), have gone into liquidation. Out of those, in six cases virtually all the money was recovered. Of the remaining two – one was a calculated gamble that was open only to certain investors informed of the risks and the other was an admitted failure where virtually all money was lost, says Caley.

Payday Loan Place Window Graphics (Photo credit: taberandrew)

All in all however, P2P lending remains a safer alternative for investment than equityfinancing. But it also remains small-fry when compared to traditional financing and lending options.

However, it is rapidly growing and new regulations, currently the subject of consultation and negotiation but expected as early as April next year, could accelerate growth even further by opening the market up to money from new major sources of funding. These include items such as cash ISAs(Individual Savings Account) – a class of UK retail investment arrangement – and hedge funds.

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